Borrowing costs near 7%; banks are downgraded

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MADRID — Spain’s benchmark borrowing rate hit its highest level Tuesday since the country adopted the euro currency, after ratings agency Fitch downgraded 18 banks and investors continued to find more questions than answers in the country’s decision to seek help for its ailing bank sector by tapping a
$125 billion eurozone bailout fund.

The yield on Spain’s 10-year bond rose to 6.81 percent in afternoon trading, according to data provider FactSet, while stocks seesawed between positive and negative territory and ended the day almost unchanged, up 0.1 percent.

The bond rate, seen as a measure of a nation’s financial health, fell back to 6.67 when markets closed. That’s the same level as Spain’s previous record — set on May 30 as the country’s economic woes multiplied, and last November after the then-ruling Socialist Party was ousted by the conservative Popular Party now struggling to keep the national afloat financially. This brings Spain’s borrowing costs dangerously close to 7 percent — near the level at which Greece, Ireland, and Portugal sought international bailouts.

Spain agreed last weekend to take a European bailout for its banks, tapping into a $125 billion
bailout fund, but investors are worried it will not solve the country’s problem as the government may have trouble paying the money back.

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Fitch said in a statement that its downgrade of the banks was a result of a previous downgrade of the Spanish sovereign debt on June 7. Fitch said it had conducted stress tests, both on the Spanish banking sector as a whole and on individual banks, updating results from tests done in 2011.

The ratings agency said the weakness of the Spanish economy would continue to have a negative effect on business volumes ‘‘which, together with low interest rates, will place pressure on revenues.’’

There has been growing concern that an increasingly large amount of Spanish government debt is being bought by its banks as the country finds fewer and fewer international buyers for its bonds. As Spain’s banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it increasingly harder to sell its bonds.

One hope among eurozone politicians is that the $125 billion loan facility will help shore up Spanish banks’ balance sheets, thereby giving them back the ability to loan money to businesses and individuals — and also buy more government debt. However, Spain is in danger of being trapped in a vicious debt circle. The $125 billion loan facility will increase the Spanish government’s debt load, and it will have to find more buyers for its bonds — which will send borrowing costs even higher. This could push Spain’s government to ask for a bailout of its own.

The rescue package for Spain’s crippled lenders was announced Saturday by finance ministers from the 17-country euro area, but the exact amount the country’s banks will receive has not yet been published.

It is not yet clear where the euro area bailout loans will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as the all the other private bond investors.

However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments will be given a higher priority than everyone else’s — which could mean that other debt would be less likely to be paid off.

Spain will wait for the results of two independent audits of the country’s banking industry before saying how much of the $125 billion it will tap.

The bailout loans will be paid into the Spanish government’s Fund for Orderly Bank Restructuring, which would then use the money to strengthen the country’s teetering banks.

While Spain’s bailout is designed to prop up its banks, investors are also worried that the Spanish government might eventually be forced into asking for a bailout to help it pay its way. Recession-hit Spain, which has the eurozone’s fourth-largest economy with unemployment of nearly 25 percent, may be too big for the eurozone’s rescue funds to handle.

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